"Borrowing to Save? The Impact of Automatic Enrollment on Debt"

Automatic enrollment in defined contribution retirement savings plans is one of the most widely recognized applications of behavioral science in a managerial setting. Previous research documents that automatic enrollment increases average savings plan contributions. But how much of the retirement savings induced by automatic enrollment is offset by increased borrowing outside the savings plan? We study a natural experiment created when the U.S. Army began automatically enrolling its newly hired civilian employees into the Thrift Savings Plan (TSP) at a default contribution rate of 3% of income. Four years after hire, automatic enrollment causes no significant change in debt excluding auto loans and first mortgages (point estimate = 0.9% of income, 95% confidence interval = [-0.9%, 2.7%]). Automatic enrollment does significantly increase auto loan balances by 2.0% of income and first mortgage balances by 7.4% of income. Because we do not observe car or home values, we do not know whether this new debt is offset by greater accumulation of the assets on which these collateralized debts were issued.